A writer must “know and have an ever-present consciousness that this world is a world of fools and rogues… tormented with envy, consumed with vanity; selfish, false, cruel, cursed with illusions… He should free himself of all doctrines, theories, etiquettes, politics…” —Ambrose Bierce (1842-1914?). “The nobility of the writer's occupation lies in resisting oppression, thus in accepting isolation” —Albert Camus (1913-1960). “What are you gonna do” —Bertha Brown (1895-1987).

Tuesday, March 18, 2014

A Review of the New Pension Benefit Law and Implementation for the Teachers Retirement System of Illinois (According to the TRS)

“Unless an injunction is filed and approved by the court to stop the
implementation of PA98-0599, the following will become effective June 2014 with
pension benefits being affected January 2015” —Ed Wollet.

Public
Act 98-0599 (Senate Bill 1)

As
of January 31, 2014

Note: A COLA Calculator is available that will
help Tier I members estimate their first COLAs under the new law.

Issue: A new comprehensive plan to overhaul the Illinois Pension
Code was signed into law by Gov. Pat Quinn on December 5, 2013. The goal of the
new law is to stabilize TRS finances and eliminate the System’s unfunded
liability by 2044, primarily by reducing benefits for retired and active
members and creating funding guarantees and contribution levels that will
gradually, over 32 years, fully fund TRS. The law was the product of six months
of work by a joint House-Senate Conference Committee and negotiations between
Democratic and Republican legislative leaders.

The Illinois House approved
the law on December 3, 2013 on a 62-53 roll call with 60 votes needed for
passage. The Senate vote was 30-24 with 30 needed for passage. [The first] lawsuits
challenging the law as a violation of the Illinois Constitution’s pension
protection clause were filed in Chicago and Springfield during December of 2013
and January of 2014. While the effective date of the new law is June 1, 2014,
court challenges could delay implementation of
the law’s provisions, but not necessarily the effective date,
until a final ruling is made.

Discussion: For TRS alone, the law is designed to eliminate the System’s
$55.7 billion unfunded liability by 2044. Eliminating the TRS unfunded
liability would guarantee continuous pension payments for all generations of
TRS members when they retire. With a 40.6 percent funded ratio, TRS cannot
right now make that guarantee for future retirees. Because of decades of
insufficient funding by the General Assembly, TRS, in effect, has less than 41
cents on hand for every $1 promised in retirement benefits to TRS members.

The law would reduce total
state contributions to TRS over the next 30 years by an estimated $85 billion;
money that could be used to fund other state services and programs. The law
would reduce the future pensions of all active and retired Tier I members
compared to pension calculated under current law. The average TRS pension is
$48,216.

TRS will not take a position on
the new law. It is the legislature’s job to dictate the laws and rules that
govern TRS and other public pension systems. The job of TRS is to administer
those laws and work to secure the System’s finances so that the promises made
to generations of teachers by the General Assembly can be kept.The new law applies to all active, inactive and
retired Tier I members (service before January 1,
2011). Tier II members are not affected.

Effective Date:

The effective date of the law is June 1, 2014. TRS is preparing to
implement the law on that date. There are multiple court challenges to the law
and a court may act to delay the implementation of the law, but there is no
indication this will happen. Until a court says otherwise, June 1, 2014 is the
date that the new law will take effect. No one should rely on or make plans
based on the potential for a delay in the law’s implementation.

Active Tier I Members
Salary Contribution Decrease:

Unless implementation of
the law is delayed, active Tier I member contributions would decrease from 9.4
percent to 8.4 percent of salary beginning in the 2014-2015 school year. For a
TRS member earning $70,000, the decrease reduces the contribution to TRS from $6,580
per year to $5,880, or $700.

Creditable Earnings
Cap for Active Tier I Members:

The creditable earnings cap
for Tier I members is equal to the creditable earnings cap for Tier II members
at the time the law takes effect, which is June 1. In fiscal year 2014, the
Tier II cap on creditable earnings that can be used to determine the Final
Average Salary is $110,631.

·Under state law, this
salary cap rises annually by a rate that is equal to one-half of the annual
rate of inflation in the previous year.

·There are exceptions to the
salary cap in the new state law that allow for a member to establish a cap that
is higher than the statutory Tier I and Tier II cap. In general, if a member’s
salary at the time the law takes effect is higher than the Tier II cap, then
the Tier II cap does not apply to that member. Specifically:

·For any member covered by
an individual contract or collective bargaining agreement that is in effect on
or prior to the effective date of the law, the cap will be the member’s
annualized salary on the day that contract expires, even if that salary is
higher than the statutory cap. A contract cannot be amended or extended after
the effective date of the law to increase the cap.

·For any member not under
contract but with a current salary that exceeds the cap, that member’s salary
cap would be set at their salary on the bill’s effective date, which right now
is June 1. Members with a “grandfathered” salary would each have their own cap.

Increased Retirement
Age for Tier I Active Members:

The law will gradually
increase, over the next 30 years, the retirement age for all teachers by five
years. The current minimum age of 55 years with 20 years of service, for
instance, would over time increase to 60 years with 20 years of service.

The retirement age for
members younger than 46 is set on a sliding scale based on your age at the time
the law takes effect, which is June 1, 2014. Under this formula, the law
essentially adds four months to the old minimum retirement age of 55 for every
year that a member is under age 46 at the time the bill takes effect; until a
total of five years has been added to the minimum retirement age.

·For members aged 46 and
older at the time the bill takes effect, the old retirement ages and
eligibility remain in force: A member can retire between the age of 55 and less
than 60 years with at least 20 years of service and receive a reduced benefit;
or at age 60 or more with at least 10 years of service and receive a “full,” or
non-reduced benefit.

·At the top of the scale,
for a member aged 45 at the time the bill takes effect, he/she can retire as
early as 55 years and four months with at least 20 years of service and receive
a reduced benefit, or as early as age 60 years and four months with at least 10
years of service and receive a “full,” or non-reduced benefit.

·At the bottom of the scale,
for a member aged 31 or younger at the time the bill takes effect, he/she can
retire as early as age 60 years with at least 20 years of service and receive a
reduced benefit, or as early as age 65 years with at least 10 years of service
and receive a “full,” or non-reduced benefit.

New COLA Formula and
Rates for Tier I Active and Retired Members:

When and if the law takes
effect, there will be two formulas used to determine the size of each year’s
cost of living adjustment. The COLA formula to be used will be determined each
year by the current size of the member’s pension.

·Each member, upon
retirement, will multiply their total service credit by a factor that is
initially set at $1,000 when the bill takes effect. This “pension threshold”
will be used in the future to determine the annual COLA. For example, a member
with 30 years of service upon retirement in 2016 would have an initial “pension
threshold” set at $30,000.

·Beginning in 2016 and in
every year thereafter, the $1,000 threshold multiplier will be increased by the
rate of inflation, but the rate will not fall below 0% in case inflation is
negative.

·As long as a member’s
pension is less than their current pension threshold, when the member is
eligible for a COLA it will be 3 percent compounded, which means calculated
from the member’s current pension.

·Once a member’s pension
equals or exceeds their threshold, the COLA calculation changes. The COLA in
every year then becomes 3 percent of the member’s current threshold amount.

COLA Calculation for
Retired Tier I Members Awaiting Their First COLA:

Under state law a Tier I
member that retires after attaining the age of 55 but before turning age 61
will accumulate an annual COLA. But he/she will not collect those accumulated
COLAs until the January after he/she turns 61.

Under the old pension law,
the COLA that accumulated for these members was 3 percent compounded.

Under the new law, if it is
implemented at a time when a member is still accumulating COLAs but has not yet
received any of those COLAs, and the member’s pension exceeds their current
pension threshold, the calculation for the accumulated COLAs will be a
combination of the old law’s 3 percent compounded increase and the new law’s
increase, which is the current pension threshold multiplied by 3 percent. For these
members, the separation between the old law calculation and the new law
calculation will be the implementation date of the law, if the courts declare
the new law constitutional.

Service Credit Used
in the New COLA Formula:

The service credit that is
used to determine a member’s eligibility for
a TRS pension is different from the service credit used to calculate your
“pension threshold” and your annual COLA.

·TRS service credit includes:

oAll regular service

oAny service time purchased by the member under an early retirement
incentive

oAny optional service purchased by the member, such as leaves of
absence, substitute teaching and teaching service in another state

oUnused sick time for anyone who is a TRS member prior to June 1,
2014.

·Eligibility: The service credit that will be used to determine your
eligibility for a pension will include all TRS service plus any service in a
pension system that has reciprocal rights with TRS.

·Threshold and COLA: The service credit that will be used in calculating your new
“pension threshold” will be only TRS service credit and will equal the service
credit that TRS used or will use to calculate your initial TRS pension at
retirement.

The COLA Formula and
Social Security:

Any TRS member that receives
Social Security from a spouse’s benefit or from other employment will still use
$1,000 as the initial “threshold multiplier” and will still receive their
Social Security benefits.

Because TRS members don’t
receive Social Security for their service in education and their TRS benefits
are not coordinated with Social Security benefits, all TRS members will use
$1,000 as the starting point for their first “threshold multiplier.” Because
the members of some other state pension systems receive Social Security and
have their benefits coordinated with Social Security, their “threshold
multiplier” starts at $800.

Staggered COLA
Forfeiture:

Tier I active members that
retire on or after July 1, 2014 would forfeit at least one COLA increase, and
as many as five increases, based on a sliding scale tied to the member’s age at
the time the law takes effect, which is June 1. Following the prescribed
forfeiture time frame, members will receive continual COLAs annually:

·Any TRS member eligible to
retire that does retire on or before June 30, 2014 will not have to forfeit any
COLA increases.

·50 years and older: Forfeit
one COLA increase in a two-year time frame immediately after retirement. The
second scheduled COLA would be forfeited.

·47 to 49: Forfeit three
COLA increases staggered every other year over a six-year time frame
immediately after retirement, starting with the 2nd scheduled COLA

·44 to 46: Forfeit four COLA
increases staggered every other year over an eight-year time frame immediately
after retirement, starting with the 2nd scheduled COLA.

·43 and younger: Forfeit
five COLA increases staggered every other year over a 10-year time frame
immediately after retirement, starting with the 2nd scheduled COLA.

Actuarial Benefit
Calculation Change:

In order to reduce the size
of pensions determined by the actuarial calculation, the law changes the
interest rates used in the formula from the mandated 6 percent and 8 percent to
a single floating rate: The new floating rate is the interest rate on a 30-year
U.S. Treasury bond plus 75 basis points. (0.75 percent) Under current
conditions, for example, the new interest rate used in the formula would be 5
percent. The new rate changes annually.

Supplemental Pension
Contributions:

When the state’s pension
obligation bonds are paid off in 2019, the state will automatically earmark
additional payments to TRS and the other state pension systems until the
systems’ funding status reaches 100 percent. These payments will be in addition
to the state’s regularly set pension contribution.

In FY 2019 the extra
payment will be $350 million and $1 billion every year beginning in FY 2020.
For TRS, this means a “supplemental” payment of $194 million in FY 2019 and
$554 million in FY 2020 and every year after that until the unfunded liability
is paid off. Also, beginning in FY 2016 the state will each year earmark 10
percent of the savings the state will realize from the law’s provisions to TRS.

Retiree Health
Insurance Subsidies:

There are no changes to the
administration or funding mechanism for the Teachers’ Retirement Insurance
Program. The law prevents TRS
from using any supplemental pension contributions from the General Assembly to
help fund any state subsidies for retiree health insurance programs. TRIP will
still be subsidized by state government, but not with money from the
supplemental pension contributions.

Mandatory State
Pension Contributions:

If the state does not pay
its annual contribution to TRS within a set period of time, TRS could go to
court to force the state to pay the contribution in the same way that the
Illinois Municipal Retirement Fund can force local governments to pay their
contributions. This provision, however, can be altered or repealed by the
General Assembly in the future.

Optional Defined-Contribution
Retirement Plan:

Up to 5 percent of Tier I
TRS members will be able to freeze their current defined benefit pension plan
benefits and join a new defined contribution benefit plan that will be in
effect until the day they retire. Right now, a TRS DC plan could accept
approximately 7,000 Tier I members.

The DC plan is open to
active Tier I members only and would begin on July 1, 2015. Members would have
one opportunity to elect membership in the new DC plan. Once members elect to
join the DC plan, they cannot rejoin the DB plan unless the DC plan is ended by
the legislature. A member would need to work at least 5 years in order to be
vested in the DC plan.

On July 1, 2015, all
members that have joined the DC plan would have their creditable service frozen
on that date for purposes of determining a DB pension. To determine a member’s
eligibility for a DB pension after the member switches to the DC plan, TRS
would use the member’s service credit accumulated under both the DB plan and
the DC plan at retirement.

Active members in the DC
plan pay an 8.4 percent salary contribution. The state’s contribution would be
determined annually. Upon retirement, members would receive a DB annuity, plus
equal payments from an accumulated DC retirement account until those funds are
exhausted.

This blog has more than three
dozen pension analyses. To read any of them, click on the link “pension
analyses” below the masthead, or navigate the right column of the blog. The link can also be found under “Taxonomies.”

Teacher/Poet/Musician

Copyrights & Fair Use: This blog contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. I am making such material available in my efforts to advance understanding of issues vital to a democracy. I believe this constitutes a “fair use” of any such copyrighted material as provided for in section 107 of the U.S. Copyright Law.

Persona

"I want everything to be explained to me or nothing. And reason is impotent when it hears this cry from the heart. The mind aroused by this insistence seeks and finds nothing but contradiction and nonsense" —Albert Camus (1913-1960).